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18 February 2014

Traders Find Camaraderie and Alpha in Social Media

The timeliness of the news distributed via social networks such as Twitter has long attracted traders in search of new sources of alpha. But now the trust earned within social communities is taking social media trading to new heights.

The use of social media within the trading industry is prolific, with an array of different applications. Instant access to news and opinion drives traders to outlets like Twitter as we push to know as much information about our products as possible—and to know it before it hits the traditional news venues.

The fact of the matter is that news flows through Twitter faster than via network television. Viewership of broadcast outlets like CNBC continues to diminish, while online social outlets like Twitter are adding to their participation base every day. This is due to both the timeliness of the news as well as the trust levels earned among traders within communities of Twitter and the Twitter derivative, StockTwits. This trust is reminiscent of the trust among traders in the pits from where many of us began. Trust developed through years of sharing the same space and relying on others to know their word is their bond and your trade with them will stand.

[Related: “Automated Trading Signals: Psychology and Social Media Sentiment”]

Demand for social content and communication grows, as traders, by their nature, tend to be gregarious – loud, boisterous individuals who a decade ago stood side by side for hours on end using idle chat and simple games like Liar's Poker to pass the day when markets were not moving. Moving behind screens hasn’t taken away the innate desire for camaraderie and a social release.

Open services like Twitter are, of course, vulnerable to misinformation, and events like a Twitter-induced flash crash may be the unfortunate result. The reality, however, is that these events draw more users into the medium than chase them out, with active monthly users of Twitter increasing by 9 million users during Q4 2013.

The use of social media is not limited to proprietary traders, as sell-side brokers and buy-side execution desks share in their thirst for more communication. This has led to problems, with banks including Barclays and Citigroup, among others, recently banning employees from the use of social media and chat rooms following the Libor interbank lending rate scandal of last year. At the same time, vendors are looking for ways to tap into this vein, as the amount of legitimate order flow that passes through chat networks is startling.

Submitting orders to a broker through a chat mechanism is certainly less error-prone than phone calls, which can easily lead to translation errors and misunderstanding. This practice has become so pervasive that some brokerage desks have individuals assigned to do little more than man their chat networks to field incoming orders and relay fills.

Social media is more than a means of chatting with peers and pushing your corporate or personal brand. Platforms like Twitter are similar to a Massive Open Online Course (MOOC) with a giant virtual playground. The informality of the messaging medium adds huge value for product managers, as the immediacy of feedback is welcome.

On a recent morning, I maintained open conversations with a fixed income trader in the U.K, a foreign exchange trader in Texas and an energy trader in California. Each of the individuals talked openly about their needs and spoke about the perceived deficiencies in execution software. All of this went on while I was tapping away on my iPhone, riding a train to the office. The informality, ease of use and 140-character limit contribute to making Twitter an ideal platform of communication for people whose work can change in a moment’s notice. It also offers that thin veil of obscurity where participants tend to speak more freely than they may in a face-to-face meeting.

Video conferencing avenues like Skype and Google Hangouts are adding live video chats for individuals and groups alike. The certain advantage to the video conference allows participants to share what they say and demonstrate how they go about their trades. From a product manager’s perspective, this is another bonanza. Talking our users as well as our own staff through functionality is a pain-free process when I can quickly start up a video Hangout to show the software on my desktop and graphically walk them through the features.

This commentary originally appeared on Trading Technologies’ TradeTalk blog.

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